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Solutions Manual, Chapter 13 1
Chapter 13
Capital Budgeting Decisions
Solutions to Questions
13-1 A capital budgeting screening decision is
concerned with whether a proposed investment
13-3 Discounting is the process of computing
the present value of a future cash flow.
13-5 Unlike other common capital budgeting
methods, discounted cash flow methods
13-7 One assumption is that all cash flows
occur at the end of a period. Another is that all
13-8 No. The cost of capital is not simply the
interest paid on long-term debt. The cost of
accepted. (a) In the case of the net present
value method, the cost of capital is used as the
discount rate. If the net present value of the
13-11 No. As the discount rate increases, the
present value of a given future cash flow
decreases. For example, the present value factor
13-12 The internal rate of return is more than
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2 Managerial Accounting, 16th Edition
computed by dividing the net present value of
the cash flows from an investment project by
the required investment. The index measures
13-14 The payback period is the length of time
for an investment to fully recover its initial cost
13-15 Neither the payback method nor the
simple rate of return method considers the time
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Solutions Manual, Chapter 13 3
Chapter 13: Applying Excel
The completed worksheet is shown below.
Note: Your worksheet may differ from the above in rows 29 and 30. The
worksheet above has been set to use the rounded-off discount factors
rather than more exact factors without rounding. For example, the factor
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4 Managerial Accounting, 16th Edition
Chapter 13: Applying Excel (continued)
The completed worksheet, with formulas displayed, is shown below.
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Solutions Manual, Chapter 13 5
Chapter 13: Applying Excel (continued)
1. With the change in the discount rate, the result is:
The net present value increases because the positive cash inflows occur
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6 Managerial Accounting, 16th Edition
Chapter 13: Applying Excel (continued)
2. For the new project, the worksheet should look like this:
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Solutions Manual, Chapter 13 7
Chapter 13: Applying Excel (continued)
a. The net present value of the project is $(17,340). Again, your answer
b. Increasing the discount rate results in making the negative net
present value even more negative. Decreasing the discount rate
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8 Managerial Accounting, 16th Edition
Chapter 13: Applying Excel (continued)
c. The internal rate of return is the discount rate at which the net
present value is zero. This occurs somewhere between the discount
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Solutions Manual, Chapter 13 9
Chapter 13: Applying Excel (continued)
d. The amount of future uncertain salvage value that would be required
to make the net present value positive, which is $53,410 ($33,410 +
$20,000), can be found by experimenting with the salvage value in
the worksheet. It can also be computed using the formula from the
text as follows:
Ne
g
ative net present value to be offset
Additional salvage =
value required Present value factor
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10 Managerial Accounting, 16th Edition
The Foundational 15
2. The annual net cash inflows are computed as follows:
A
A
3. The present value of the annual net cash inflows is computed as
follows:
Item Year(s) Cash Flow
14%
Factor
Present
Value of
Cash Flows
A
nnual net cash
4. The project’s net present value is computed as follows:
Now
Years
1-5
Purchase of equipment ………. $(2,975,000)
Sales ……………………………… $2,735,000
Variable expenses …………….. (1,000,000)
Out-of-pocket costs …………… __________ (735,000)